With many billions of dollars of money from institutional investors impatiently waiting on the sidelines, investment banks, crypto exchanges, traditional custody players, and crypto custody solution providers are all working hard to come up with good SEC-approved answers to the crypto custody problem.
In United States, under rule 206(4)-2 of the Investment Advisers Act of 1940, also knows as the “custody rule”, SEC-registered investment advisers with custody of clients’ funds and securities must protect their clients’ assets according to the requirements of the custody rule:
- “Use of ‘qualified custodians’ to hold client assets.” (A qualified custodian” must hold the funds or securities in an account either under the client’s name or under the adviser’s name as agent or trustee for its clients.”)
- “Notices to clients detailing how their assets are being held.”
- “Account statements for clients detailing their holdings.”
- “Annual surprise exams.”
- “Additional protections when a related qualified custodian is used.” (“If the custodian is also the investment adviser or is affiliated with the adviser in some way, the adviser must, among other things, obtain a report from the related qualified custodian that includes an opinion of an independent public accountant regarding the effectiveness of the custodian’s procedures for safeguarding client funds and securities every year.”)
U.S. based institutional investors that are interested in getting into cryptocurrencies will only feel safe if they are dealing with SEC-registered entities that are able to offer qualified custodial services.
According to Bloomberg, breaking this custody barrier, would unleash a large number of institutional investors, thereby boosting cryptocurrency prices:
“[qualified custodial solutions] would pave the way for vast tracts of investors to expand into crypto, potentially reviving prices in markets that have tumbled in recent weeks. Regulated crypto custody would allow more institutional buyers — such as hedge funds and pensions — to invest in Bitcoin, Ether and a multitude of other coins. Retail brokerages would have a safer way to let clients add crypto to portfolios stuffed with stocks and bonds.”
As far as U.S. based crypto exchanges are concerned, we know that both Circle and Coinbase are in talks with the SEC in order to be able to offer SEC-regulated trading platforms, but Coinbase is much further ahead since a company it acquired recently, Venovate Marketplace, already holds an Alternative Trading System (ATS) license. Coinbase also has a custody service, but Coinbase still needs to convince the SEC that it meets all of the requirements of the custody rule. According to a Coinbase spokesperson, Coinbase is expecting to receive SEC’s approval soon.
One company that looked like it was going to be the first to offer a qualified custodial service was institutional crypto custody solution provider BitGo, which announced on 25 January 2018 that it had entered into an agreement to acquire Kingdom Trust, a company that claims to be a qualified custodian. However, on 24 May 2018, BitGo announced that it had “decided not to move forward with the acquisition of Kingdom Trust” and that, instead, it was going to build its own qualified custodial offering.
So, it looks like there is a good chance that the race to be provider of the first qualified crypto custodial service will be won by one of these three companies.